Guidelines for applicability of Section 194Q

Section 194Q

Applicability of Section 194Q

1) Applicable from 1st July 2021.

2) When the buyer purchases any goods of value or aggregate of value > 50 Lakhs in the previous year.

3) Buyer deducts @0.10% at the time of credit of such sum to the account of the seller or at time of payment whichever is earlier on such amount exceeding 50 lakhs.

We can better understand the applicability of Section 194Q through an example.

Example: XYZ ltd purchased goods from the ABC Ltd. during FY 21-22 and month-wise details are as follows: (Assume XYZ Ltd Turnover of FY 20-21 is more than 10 crores)

Notes:

1) TDS is to be deducted only on Rs.10,00,000 (i.e. Rs.60,00,000-50,00,000) because Limit of Rs.50,00,000 lakhs is to be calculated from 01/04/2021.

2) We are assuming that the Invoice date & credit date are the same.

3) Credit date means the date when the Journal entry is passed in the books of account.

Journal Entries in the books of XYZ Ltd (July Month).

1. 04.07.2021 Purchase A/c Dr 15,00,000
2. To ABC Ltd. 14,99,000
3. To TDS Liability 1,000

Calculation of threshold for the financial year 2021-22

(1) Since section 194Q of the Act mandates the buyer to deduct tax on the credit of sum in the account of the seller or on payment of such sum, whichever earlier, the provision of this subsection shall not apply on any sum credited or paid before 1st July 2021.If either of the two events had happened before 1st July 2021 that transaction would not be subjected to the provisions of section 194Q of the Act.

(2) Since the threshold of fifty lakh rupees is with respect to the previous year, the calculation of the sum for triggering TDS under section 194Q shall be computed from 1st April 2021. Hence, if a person being buyer has already credited or paid fifty lakh rupees or more up to 30th June 2021 to a seller, the TDS under section 194Q shall apply on all credit or payment during the previous year, on or after 1st July 2021, to such seller.

Crux

1. Rs 50 Lakhs Limit is to be calculated from FY 01/04/2021.
2. TDS to be deducted under section 194Q from 01/07/2021.
3. If Credit entry before 01/07/2021 and payment after 01/07/2021 then there is no TDS requirement.
4. If Payment before 01/07/2021 and credit entry after 01/07/2021 then also there is no TDS requirement.

Adjustment of GST Amount for Section 206C(1H) & 194Q

1) No adjustment on account of GST is required to be made for the collection of tax under sub-section (IH) of section 206C of the Act since the collection is made with reference to receipt of the amount of sale consideration.

2) Accordingly, with respect to TDS under section 194Q of the Act, it is clarified that when tax is deducted at the time of credit of amount in the account of the seller and in terms of the agreement or contract between the buyer and the seller, the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted under section 194Q of the Act on the amount credited without including such GST.

However, if the tax is deducted on a payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify that payment with the GST component of the amount to be invoiced in the future.

Crux

1. No GST Adjustment is required in the case of TCS as per section 206C(1H).
2. GST Adjustment is required in the case of TDS as per section 194Q if it is separately shown in the invoice.
3. GST Adjustment is not required in the case of TDS as per section 194Q if it is the buyer making advance payment to the seller.

Adjustment of Purchase Return

Further, with respect to purchase return, it is clarified that the tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus, before purchase return happens, the tax must have already been deducted under section 194Q of the Act on that purchase. If that is the case and against this purchase return the money is refunded by the seller, then this tax deducted may be adjusted against the next purchase against the same seller. No adjustment is required if the purchase return is replaced by the goods by the seller as in that case the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.

Crux

1) If the TDS is already deducted and goods are returned by the buyer to the seller then TDS already deducted will adjust in the next purchase from the same seller.

2) In case Goods are returned by the buyer to the seller and the seller replaced those goods then there is no adjustment required.

TDS Requirement if a buyer is a non-resident

1) A Non-resident who purchases the goods from a seller resident in India is effectively connected with the permanent establishment of such non-resident in India then only there is a requirement of TDS deduction under section 194Q.

2) For this purpose, "permanent establishment" shall mean to include a fixed place of business through which the business of the enterprise is wholly or partly carries on.

TDS and TCS Requirement if Income is exempt

1) Section 194Q of the Act shall not apply to purchase of goods from a person, being a seller, who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act, etc.).

2) Similarly, with respect to subsection (1 H) of section 206C of the Act, it is clarified that the provisions of this subsection shall not apply to the sale of goods to a person, being a buyer, who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act, etc.).

3) The above clarifications would not apply if only part of the income of the person (being a seller or being a buyer, as the case may be) is exempt.

Crux

1) Section 194Q not apply if the whole Income of the seller is exempt.

2) Section 206C(1H) does not apply if the whole Income of the buyer is exempt.

TDS is to be deducted on advance payment

1) Section 194Q of the Act shall apply to advance payment made by the buyer. It is clarified that since the provisions apply on payment or credit whichever is earlier, the provisions of section 194Q of the Act shall apply to advance payment made by the buyer to the seller.

Crux

1) TDS is applicable on the advance payment made by the buyer to the seller.

Section 194Q of the Act shall apply to the buyer in the year of incorporation?

1) Section 194Q of the Act a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Since this condition would not be satisfied in the year of incorporation, the provisions of section 194Q of the Act shall not apply in the year of incorporation.

Crux

Section 194Q not applicable in the year of incorporation.

Criteria to check Rs.10 crores limit

1) For section I94Q of the Act, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Hence, the sales or gross receipts or turnover from business carried on by him must exceed Rs.10 crore. His turnover or receipts from the non-business activity is not to be counted for this purpose.

Crux

1) Turnover of Non-Business activity should not be considered while calculating Rs.10 crore limit.

Analysis of the cross-application of section 194O, 194Q & 206C(1H)

1) If tax has been deducted by the e-commerce operator on a transaction under section 194-0 of the Act including transactions on which tax is not deducted on account of sub-section (2) of section 194-0, that transaction shall not be subjected to tax deduction under section 194Q of the Act.

Crux

If TDS is deducted under section 194O then no TDS is required to be deducted under 194Q.

2) Though sub-section (IH) of section 206C of the Act provides an exemption from TCS if the buyer has deducted tax at source on goods purchased by him, to remove difficulties it is clarified that this exemption would also cover a situation where instead of the buyer the e-commerce operator has deducted tax at source on that transaction of sale of goods by the seller to the buyer through e-commerce operator.

Crux

If TDS is deducted under section 194O then no TCS is required to be collected under 206C(1H).

3) If a transaction is both within the purview of section 194-0 of the Act as well as section 194Q of the Act, tax is required to be deducted under section 194-0 of the Act and not under section 194Q of the Act.

Crux

If Transaction on which 194Q & 194O both applies then TDS is required to be deducted under 194O not under 194Q.

4) If a transaction is both within the purview of section 194-0 of the Act as well as sub-section (IH) of section 206C of the Act, tax is required to be deducted under section 194-0 of the Act. The transaction shall come out of the purview of sub-section (IH) of section 206C of the Act after tax has been deducted by the e-commerce operator on that transaction. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under sub-section (IH) of section 206C of the Act on the same transaction. It is clarified that here primary responsibility is on e-commerce operator to deduct the tax under section 194-0 of the Act and that responsibility cannot be condoned if the seller has collected the tax under sub-section (IH) of section 206C of the Act. This is for the reason that the rate of TDS under section 194-0 is higher than the rate of TCS under sub-section (IH) of section 206C of the Act.

Crux

If Transaction on which 194O&206C(1H) both applies then TDS is required to be deducted under 194O and section 206C(1H) not apply.

5) If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (1H) of section 206C of the Act, the tax is required to be deducted under section 194-Q of the Act. The transaction shall come out of the purview of sub-section (1H) of section 206C of the Act after tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under subsection (1H) of section 206C of the Act on the same transaction. However, if, for any reason, tax has been collected by the seller under sub-section (1H) of section 206C of the Act, before the buyer could deduct tax under section 194-Q of the Act on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. This concession is provided to remove the difficulty since the tax rate of deduction and collection are the same in section 194Q and subsection (IH) of section 206C of the Act.

Crux

• If Transaction on which 194Q &206C(1H) both applies.
• If TDS is deducted by the buyer under section 194Q then the seller is not required to collect TCS as per section 206C(1H).
• If tax has been collected by the seller under subsection (1H) of section 206C of the Act, before the buyer could deduct tax under section 194-Q of the Act on the same transaction, such transaction would not be subjected to tax deduction again by the buyer.

Applicability on transactions carried through various Exchanges

The provisions of section 194Q of the Act shall not be applicable in relation to

1) Transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation including recognized stock exchanges or recognized clearing corporations located in International Financial Service Centre.

2) Transactions in electricity, renewable energy certificates, and energy-saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.

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